SEBI’S ANGEL INVESTOR SHAKE-UP UNDER THE AIF: FUELLING INDIA’S START-UPS OR GROUNDING THEIR WINGS?

This post is authored by Arushi Yadav, 3rd year B.A. LL.B. (Hons.) student at Hidayatullah National Law University.

INTRODUCTION

India’s start-up ecosystem is a significant force driving innovation and economic growth. However, the reforms of Securities and Exchange Board of India (“SEBI”) to angel fund regulations in June 2025 have sparked a heated debate. These changes aim to improve investor protection, simplify operations, and meet international standards. Despite that, they might shut out new investors and limit the variety that supports early-stage innovation. By requiring Accredited Investor (“AI”) status, adjusting investment thresholds, and removing restrictive caps, SEBI hopes to update angel investing. But will these reforms increase start-up funding or create obstacles for new entrepreneurs, especially in underserved areas? This article examines the changes, considers their broad implications, and proposes a thoughtful and inclusive approach to strike a balance between safety and accessibility.

DECODING THE KEY REGULATORY CHANGES AND THEIR OBJECTIVES

SEBI’s amendment, announced in June 2025, keep angel funds within the Alternative Investment Funds (“AIF”) framework while changing investor eligibility and operational aspects. The main reform requires mandatory AI status. This has now replaced the 2013 self-declaration model, which required individuals to have a net worth of ₹2 crore or corporates to have a net worth of ₹10 crore. Concerns of misuse, global alignment, and investor protection partly drove this shift from self-declaration to third-party accreditation. Now, AIs are required to go through strict third-party verification. They need to meet criteria such as an annual income of ₹2 crore, a net worth of ₹7.5 crore (with half in financial assets), or a combined income of ₹1 crore and a net worth of ₹5 crore. Other reforms include lowering the minimum investment per start-up from ₹25 lakh to ₹10 lakh, increasing the cap from ₹10 crore to ₹25 crore, removing the 25% exposure limit, and allowing follow-on investments in companies that are no longer classified as start-ups. Funds can now have more than 200 investors, and managers must contribute 0.5% or ₹50,000 per deal. Existing investments are grandfathered, with a one-year transition period to facilitate compliance.

These reforms indicate a clear shift toward a more professional and globally aligned angel investing environment. They draw inspiration from frameworks like the US Securities and Exchange Commission’s (“SEC”) qualified purchaser rules. SEBI aims to ensure that only investors with a good understanding of risk can participate. This should boost trust and efficiency. However, it raises an important question: Does this increased scrutiny strengthen the ecosystem or limit access to essential early-stage capital, especially for India’s varied start-up community?

THE BENEFITS: STRENGTHENING THE ECOSYSTEM WITH STRONG PROTECTION AND IMPROVED FLEXIBILITY

1. Strengthening Investor Protection and Elevating Systemic Credibility

The 2013 self-declaration system allowed unverified investors to enter high-risk ventures, leading to potential financial losses and erosion of trust. To address this, the new framework requires accreditation through third-party agencies, which ensures that only credible investors are permitted. Accredited angel funds are then treated on par with Qualified Institutional Buyers (“QIBs”), who are recognised as sophisticated investors with regulatory oversight and due diligence capacity. This regulatory recognition, rather than merely being able to bypass limits, is what strengthens credibility and reduces fraud risks by filtering out unregulated players. As a consequence of being treated like QIBs, accredited angel funds are allowed to go beyond the 200-investor ceiling while still complying with company law obligations. Fund managers benefit from simpler documentation and fewer term-sheet filings, which speed up investor onboarding and deal execution. For start-ups, this means greater access to vetted, trustworthy capital, boosting confidence in investor reliability. Added flexibility also allows angel funds to invest their entire corpus in one venture, unlike other AIFs, potentially sparking transformative investments in India’s start-up ecosystem.

2. Catalysing Capital Inflow and Amplifying Operational Agility

Lowering the minimum investment to ₹10 lakh could attract more AIs, especially with the removal of the 200-investor cap. This change enables larger syndicates, which can drive substantial funding rounds for start-ups. The option for follow-on investments after the start-up phase allows angel investors to support high-potential companies for a longer period, thereby improving returns and fostering growth. With angel commitments reaching ₹10,138 crore by March 2025, a 44% increase per year, these reforms could bring in ultra-wealthy investors who were previously held back by outdated rules. SEBI’s focus on high-quality capital widens the funding pool for growing start-ups. At the same time, relaxed compliance requirements, like fewer filings and simpler processes, improve efficiency. This allows fund managers to concentrate on creating value instead of dealing with bureaucratic obstacles.

THE CHALLENGES: RISKS OF EXCLUSION AND THREATS TO ECOSYSTEM VITALITY AND DIVERSITY

The AI mandate risks turning angel investing into an elite, wealth-focused realm, potentially pushing away an important part of the ecosystem. By the May of 2025, only 649 AIs existed, compared to more than 321,000 high-income tax filers. Wealth-based criteria overlook this “context-heavy” expertise, which is essential for early-stage start-ups. The ₹12,000 accreditation fee and strict paperwork may deter new angels, prompting them to either opt for direct investments or exit the ecosystem altogether. Critics argue that by linking eligibility solely to wealth, SEBI’s action may shrink the angel pool, leaving start-ups without diverse, strategic funding, especially in tier-2/3 cities that rely on informal networks.

Diversity fuels innovation, but these rules could attract capital from the ultra-rich, creating a similar investor base and excluding underrepresented sectors. The “angel” title risks becoming a copy of venture capital, ignoring impact-driven or non-metro sectors like DeepTech, Agri-tech, or social enterprises. Previous regulatory flexibility has shifted to rigidity, restricting the risk-taking and mentorship-driven spirit of angel investing. By focusing on wealth instead of expertise, SEBI might damage the ecosystem’s inclusivity and resilience, hindering innovation in areas and sectors that need it most, such as rural start-ups or emerging technologies.

A NEW APPROACH: CREATING A HYBRID ACCREDITATION FRAMEWORK FOR INCLUSIVE AND SUSTAINABLE GROWTH

The protection-versus-access debate needs a new approach. We should combine financial strength with business insight to create a more inclusive system. SEBI could lead with a tiered accreditation system that includes non-financial criteria, such as start-up experience, entrepreneurial background, or certified courses from organisations like the National Stock Exchange (“NSE”), Indian Institute of Management (“IIM”), or specific start-up programs. This reflects trends from the US SEC, where expertise is also considered in addition to an investor's wealth. The SEC focuses on ensuring fair markets and transparent information, which can involve differentiating protections based on investor knowledge, as seen in rules for public company disclosures and the protection of retail investors compared to accredited (sophisticated) investors. We can envision Tier 1 for ultra-rich AIs under the current rules and Tier 2 for experienced professionals with a net worth of ₹1 crore and at least five years in start-ups. Qualitative filters could help ensure inclusivity while keeping high standards.

This blended approach could increase the number of AIs from 649 to thousands without lowering quality. Tying accreditation to tax incentives, such as simpler deductions or exemptions, might motivate more people to join while also addressing privacy concerns related to tax disclosures. This practical solution empowers diverse investors, creating a vibrant ecosystem that values both financial support and expertise, helping start-ups thrive across India's varied landscape.

Furthermore, the US allows self-certification for accredited status, which relaxes entry while maintaining high standards. The UK’s EIS/SEIS schemes offer tax breaks with minimal checks, which enhances investor diversity and supports early-stage ventures. India’s verification process builds trust but makes access harder, especially for global investors who face complex tax return requirements. SEBI could combine the UK’s flexibility with the US’s standards, adjusting rules for India’s unique position as the third-largest start-up hub. To avoid overwhelming regulations, it’s essential to create scalable processes, such as expanding accreditation agencies beyond Central Depository Services Limited (“CDSL”) and National Securities Depository Limited (“NSDL”). A simpler, principle-based approach could maintain momentum while promoting inclusion.

CONCLUSION

SEBI’s reforms represent a significant step toward a professional angel investing environment. They enhance protection, offer greater flexibility, and facilitate increased capital flow. Lower minimums, follow-on provisions, and relaxed caps could boost funding. However, exclusion risks may limit diversity and the vitality of early-stage investments, especially in tier-2 and tier-3 cities, as well as in underrepresented sectors. A hybrid accreditation model that values expertise in addition to wealth offers a balanced solution. SEBI should seek more consultation and refine its approach with another paper to address capacity concerns and simplify processes. With India’s start-up scene thriving and gaining global recognition, these rules must support its growth rather than hindering it. Thoughtful changes can turn these reforms into a driving force for inclusive and dynamic growth, ensuring India’s entrepreneurial spirit flourishes across various regions and industries.

A major challenge is the accreditation process itself. The current capacity of agencies like CDSL Ventures and NSDL Data Management might slow down applications as interest from investors increases. For global investors, simplifying tax return requirements can help them enter the market more easily. A digital-first platform for accreditation could speed up adoption and ensure that the ecosystem doesn’t stall during the transition. Addressing these operational gaps is as important as the regulations themselves in keeping funds flowing and supporting India’s start-up goals.